Illinois Pays 17% More Than in April for $1.3 Billion Muni Sale

June 26 (Bloomberg) -- Illinois paid 17 percent more in
extra yield than in April as it issued $1.3 billion of general
obligations, less than a month after lawmakers failed to bolster
the nation’s worst-funded state pension system.

The deal was Illinois’s first since its credit rating was
cut after legislators left the state capital on May 31 without
striking a deal on retirement costs. The issue included
uninsured bonds maturing in July 2023 that yielded 4.46 percent,
down from 4.56 percent in preliminary marketing, data compiled
by Bloomberg show.

The revised yield is about 1.5 percentage points more than
benchmark munis. In April, the state sold 10-year securities
yielding 3.3 percent, or 1.29 percentage points above AAAs.

The state was still able to lower borrowing costs from
preliminary levels as investors said the biggest losses since
2008 in municipal bonds signal a buying opportunity. The $3.7
trillion municipal market has lost about 5 percent this month as
of June 25, Bank of America Merrill Lynch data show.

Yields on 10-year debt have risen to the highest since
April 2011, leading issuers such as Georgia to cancel sales this
week. Individuals have pulled $5.3 billion from muni mutual
funds in the past three weeks, the most since February 2011,
Lipper US Fund Flows data show. Detroit this month became the
biggest U.S. city to default on bonds since the 1970s.

Buy Call

David Kotok at Cumberland Advisors and Chris Mauro at RBC
Capital Markets said in reports today that the rising interest
rates signal a buying opportunity in local-government debt.

Illinois lowered yields even more in the longest-maturing
portion of the sale. Uninsured debt maturing in July 2038 priced
at 5.65 percent, down 0.2 percentage point from initial
marketing, Bloomberg data show.

The new interest rate on the 25-year debt is equivalent to
a 9.4 percent taxable yield for individuals in the highest
federal income-tax bracket.

Fitch Ratings cut Illinois on June 3 to A-, the fourth-lowest investment grade. Moody’s Investors Service on June 6
dropped it to A3, equivalent to Fitch’s rank.

Democratic Governor Pat Quinn called a special session for
June 19, and that gathering also proved unsuccessful. Unable to
produce majority support for comprehensive changes, house and
senate lawmakers created a committee to produce a compromise
bill to be voted on in July.

The debt sold today will mature from 2014 to 2038 and
proceeds will be used for projects including rebuilding the
Chicago Transit Authority’s Red Line train. Wells Fargo
Securities was the lead underwriter. For the second time this
year, Illinois issued general obligations that included portions
backed by Assured Guaranty Municipal Corp.